With all the talk of Standard & Poor’s downgrade, no one mentioned that the ratings agency’s business model is, essentially, lying for money.

Instead, many politicians insist that the S&P downgrade is the reason for the market turmoil — not the banking freeze-ups in the Eurozone or political paralysis here. The credibility accorded to S&P by U.S. political elites shows that the rot is indeed deep — and worrisome.

What’s really happening is an attempt by both parties to justify slashing Social Security and Medicare. Republicans have long wanted to roll back the New Deal. What is relatively new is that a Democratic president is now dead set on cutting these programs as well.

President Barack Obama, in his speech Monday about the downgrade, used the market turmoil as an excuse to do just that. After a debt ceiling deal in which the Democrats argued that defense spending cuts — not entitlement cuts — could close the long-term deficit, Obama said Monday that there’s “not much further” he can trim defense. Despite the fact that defense spending has gone up on his watch. Instead, Obama said, we need cuts in social spending, or, as he phrased it, “modest adjustments to health care programs like Medicare.”

In effect, there seems to have been a merger of both parties into a single force advocating for the interests of bondholders and the cutting of Medicare and Social Security. It’s why both Republicans and Democrats are now blaming each other for the downgrade — as though the downgrade were to be taken seriously.

First, if S&P calls for Treasury debt to be treated as a problem by the markets, Treasury borrowing rates should have increased. But they fell — because investors want to hold U.S. government debt as the world’s safest harbor.

Why trust S&P, anyway? Let’s review the carnage and incompetence of this company. It was, more than almost any other firm, a creator and catalyst for the financial crisis. And its analysts knew it.

In 2003, S&P used its power over mortgage financing to crush state anti-predatory mortgage lending laws around the country. Then, as the housing bubble grew, the company slapped AAA ratings on anything it could make money on. “Let’s hope,” one S&P analyst said, in a 2008 transcript released by Rep. Henry Waxman (D-Calif.), “we are all wealthy and retired by the time this house of cards falters.”

Two other S&P analysts talked in another transcript about the company’s rating methods for subprime securities. “That deal is ridiculous,” one analyst said. “… We should not be rating it,”

“It could be structured by cows,” the other analyst replied, “and we would rate it.”

This is what S&P is — it hasn’t changed. Right before the downgrade, in fact, the Treasury found that the company had made a $2 trillion accounting error.
This incompetence is by design. S&P is always paid by the company issuing the debt it is rating. It’s as if a newspaper ran stories specifically sponsored and with editorial input from advertisers. Such a business is designed — and in many ways paid — to lie.

But we know this. So do President Barack Obama, House Minority Leader Nancy Pelosi (D-Calif.), Speaker John Boehner (R-Ohio), the longtime, and influential, deficit hawk Pete Peterson and every other elite political actor now fretting over this “downgrade.”

The ratings agency has not been particularly important because of its predictive powers. Ratings agencies were part of a system that urged governments around the world to slash social programs and loosen regulations on business for fear of the wrath of international investors.

In the early 1990s, according to Canadian investigative journalist Linda McQuaig, Canadian corporate executives encouraged ratings agencies to threaten a downgrade of their nation’s credit as an inducement for cutting social spending and lowering high-end tax rates. It worked.

And today we are seeing that Republicans use ratings agencies to support their conservative agenda: that the government can’t spend so much on entitlements such as Medicare and Social Security. Benefits of public employee unions must also be slashed, public assets privatized and the disruptive power of unions countered.

The government, this argument insists, needs to be run like a business — and rated like one. That would make sense to S&P, whose parent company is run by Terry McGraw, who moonlights as a leader of the Washington corporate powerhouse, the Business Roundtable.

S&P’s downgrade may ultimately provide cover for the Democrats leadership, as well. They now have the excuse that can justify to supporters why they have no choice but to break promises made to senior citizens, unions and the public. For example, House Democratic Whip Steny Hoyer has been giving speeches for years advocating entitlement cuts.

So S&P is offering these politicians an excuse for a remarkably unpopular action. By treating this downgrade as meaningful, Democrats and Republicans could join in a bipartisan effort to slash entitlements — government social programs that are popular, work well and have relatively strong funding streams.

The reasoning is Orwellian. Medicare is cheaper and better than private health insurance — which is why we cannot afford it. Social Security may run out of money in 27 years— why it’s important to cut the payroll tax that funds it. The Bush tax cuts for the wealthy should be extended indefinitely — but the prospect of Social Security and Medicare for everyone else creates a fiscal emergency.

There’s a big problem in destroying these entitlement programs, however. It’s not just the increase in poverty and suffering. These programs, which people have paid for with payroll taxes for their entire lives, give Americans a sense of why it’s useful to support the government as legitimate. To see what happens when a social contract falls apart, look at the massive rioting in London.

Middle-class incomes are down radically in the U.S. since 2007, as much as 15 percent according to new Internal Revenue Service data. Home equity is still falling. If cherished entitlement programs are also savaged by the politicians who destroyed our life savings, citizens might begin to question whether this whole constitutional democracy thing is worth it.

Strange and ominous political eddies are already emerging. Congressional disapproval is higher than 80 percent. This could turn ugly — as it has before in U.S. history. While we’ve airbrushed the legacy of political violence out of U.S. history, it’s there. Labor conducted gun battles with Pinkerton private military forces in the late 19th century. Strikes often turned deadly in the 1930s. If there are serious defense cuts, the prospect of hundreds of thousands of war-weary former soldiers thrown into a terrible economy is not, shall we say, a recipe for social stability.

With proposals on the table to cut defense and social spending in a deflationary economy, maybe U.S. political leaders are just throwing one final, blow-out empire-ending party.

I don’t mean to push the panic button. After all, America has a stable political order that can handle a great deal of stress. This system, though, is rooted in a middle class that believes its interests are aligned with those running the country.

As the wealth, opportunity, social status and economic security of the middle class evaporate, so, too, could this belief.

We don’t not want to find out what happens if we should reach that point. But if politicians keep using S&P to justify bondholder-friendly policies that damage the interests of the middle class — we just might.

Matt Stoller worked on the Dodd-Frank financial reform law and Federal Reserve transparency issues as a staffer for Rep. Alan Grayson (D-Fla.). He is now a fellow at the Roosevelt Institute.